Saving money right now? Here’s what to do with it.

While the economy is a challenging situation for many, some of us are managing to save money by staying at home. Here’s some considerations for what to do with that extra cash.

Despite the distractions of self-isolation during the pandemic, if you are fortunate enough to be employed right now and earning a regular paycheque, you may actually be saving some money. By staying at home, many of us are not paying for gas or transit, vacations are on hold and we are not eating out or making impulse buys at the mall. More dough in your pocket is always a good thing but if you want your money to put you in a better situation, here are some ideas to ponder depending on your personal situation. Georgia Swan, a Tax and Estate planner with TD Wealth, talks about someoptions you have for your extra cash.

Pay off your debts

If you have extra funds, it really makes sense to pay down high-interest loans and debt. The interest on loans just eats into your savings and you may end up further behind. Therefore, it’s best to start to pay off the loans which hurt the most, and that usually starts with credit cards. If you are able to chisel away at this debt when you can, you can actually save more money because you won’t be paying interest. You may even want to make a strategy to eventually pay off your monthly bill completely every month. Next, take a look at your car loan.Swan says you can make a significant dent in how much you owe by making an extra loan payment or a one-time lump sum payment. Both these tactics may help you pay down your car loan faster and decrease the amount of interest you would pay. Lastly, you can look to unsecured lines of credit. Once again paying more than the minimum payment each month on lines of credit can save thousands of dollars over the life of the debt.

Open a savings account

One of the most basic things to do with extra funds is open a simple savings account. The appeal of a savings account is its flexibility. You will receive some interest on your savings, but you also won’t have your money “locked-in” if you need to access that cash in a hurry or an emergency. You can also open up a joint savings account with a spouse. As well, you have the option of using an automatic savings plan so that a certain amount of money comes off your paycheque or out of your chequing account into the savings plan so that your savings will grow. The pandemic should serve to underscore the benefit of having at least three or more months’ worth of expenses saved up at all times, she says. If you couldn’t start such an emergency fund before, now may be the time to start by saving one week’s worth of expenses, then another week and so on.

Open a Tax–Free Savings Account

According to Swan, a TFSA is also a place where you can place extra cash. While your money is less accessible than a common savings account, it is still accessible if you should absolutely need it. Funds in a TFSA can be used to make investments with Guaranteed Investment Certificates (GICs), Mutual Funds, Exchange-Traded Funds (ETFs) stocks and bonds. As the name suggests, a TFSA also has features that allow your savings to grow tax-free. The returns on your investments are not subject to tax as they grow, but also the funds (both capital and income) will not be taxed when they are withdrawn. There is an annual limit on how much you can contribute to a TFSA each year (currently $6,000), and unused room is carried forward and used later. An individual who turned 18 in 2009 (the year TFSAs were introduced) and who has never contributed to a TFSA, has a maximum contribution room of $69,500 to date. Even though you can hold cash within a TFSA, it’s not for those who want ready cash at hand. TFSAs are primarily for saving as the name implies and it’s smart that those savings are invested.

Open a Registered Retirement Savings Plan

RRSPs are ideally geared toward saving and investing over the long haul for retirement. Like a TFSA however, it can be used to make investments with Guaranteed Investment Certificates (GICs), Mutual Funds, Exchange-Traded Funds (ETFs) stocks and bonds, and is not meant as a temporary place to deposit ready cash. Where an RRSP is superior to a TFSA is that it generally has higher contribution limits based on your income and the tax savings of contributions to a RRSP are more immediate. RRSPs not only allow the investments to grow tax-deferred, any funds contributed decreases your taxable income which may result in even more savings in real time in the form of a lower tax bill or even a refund. You may contribute 18% of your income into an RRSP annually up to a limit of $26,500 (for 2019) and $27,230 (for 2020). Any unused contribution limit in a particular year can be carried forward indefinitely and accumulated.

Pay down your mortgage

Buying a house is probably the largest single purchase any of us will make, and getting that mortgage off the books takes time and effort. But Swan says, once your mortgage is paid off you can really enjoy the fruits of your labour as you redirect your money into other areas. Since interest builds up over time and can literally add years to your mortgage amortization, it may make sense to chop this debt down as often and as much as you can. Depending on what kind of mortgage you have, you can make an extra payment or a lump sum payment once a year with the option to pay down your principal, the interest charges or both. Additional payments can cut years off your mortgage payment schedule and therefore can save you thousands in the long run.

Donate to charity

Giving to others makes us feel better, improves the lot of others less fortunate in the world and, less benevolently, give us a tax credit that can lower taxable income and save more money. While it’s tempting to give at every opportunity, it’s best from a tax point of view to donate where you can receive a receipt for your charitable donation. So, choose your favorite charity or cause and give what you can: These days there are numerous causes that can use some of your help.

DON SUTTON

MONEYTALK LIFE

ILLUSTRATION

VERONICA PARK

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